The stock market selling storm is over

The bear market appears to have bottomed out. As usual, all the negative issues that had previously been downplayed are now fodder for new warnings too late. The negativity is backed up by ugly numbers, charts, and graphs. The problem is that this is what liquidation funds look like when buying opportunities are at their best. And that means now is the time to buy.

But couldn’t there be another sale next week?

Of course, but it might as well not be. So which route should we take? Do you wait for lower prices or do you act now and lock in the low prices currently available? Experience shows that the best approach is to “just do it”, when a confluence of indicators occurs like now. Successfully meeting the “buy low” objective means not trying to “buy the bottom”.

There is a special reason to act in the coming week. Two expected reports are coming up: the BLS CPI reading for April (Wednesday, May 11 at 8:30 a.m. ET) and preliminary results from the University of Michigan Consumer Sentiment Survey for May (Friday, May 13). at 10 a.m. ET). What is unique this time is that what The results will provide buying support, either from a positive reading that brings relief or from a boring negative that is seen as destined to change.

And there is one more indicator of a market bottom: high correlation between stock movements. The Wall Street Journal added this important information to an article about the Bausch & Lomb IPO (emphasis mine):

“The correlation between individual stocks in the S&P 500 has increased dramatically in recent months as fears that rising interest rates could trigger a recession lead to a sell-off….

“During the three months before tech stocks started to slide in December on inflation and interest rate fears, the average stock moved in the same direction as the S&P 500 39% of the time, according to Ned Davis. Research. Since then, that has jumped to 61%.”

“Broad” selling means wholesale dumping to eliminate exposure to the stock market. The driving force may not be panic, but it certainly is stock market pessimism.

Next: The Ugly Numbers That Indicate a Market Bottom

These are the many numbers that seem worrying, but also represent an opportunity. (All data as of Friday, May 6).

First, the distance of each index from its 52-week high, along with the potential return if it were to recover fully.

  • S&P 500: 14% lower (recovery = 16% higher)
  • Dow Jones Industrial Average: 11% lower (recovery = 12% higher)
  • Nasdaq Composite – Down 24% (Recovery = 32% Up)
  • Nasdaq 100 – 23% lower (recovery = 30% higher)

Second, the large number and percentage of shares fell 20% or more from their 52-week highs.

  • S&P 500 – 258 of 500 (52%)
  • Dow Jones Industrial Average – 12 of 30 (40%)
  • Nasdaq Composite (share price of at least $10; excludes funds and SPAC) – 1,083 of 1,691 (64%)
  • Nasdaq 100 – 62 of 100 (62%)

Third, the imbalance between the new year-to-date highs and the new lows:

  • New York Stock Exchange (32 vs. 394)
  • Nasdaq (39 vs. 895)

Fourth, the low percentage of stocks above their 200-day moving average trend lines:

  • S&P 500 – 43% (low, although above previous low)
  • Dow Jones Industrial Average: 35% (low, though above previous low)
  • Nasdaq Composite – 13% (matches lowest)
  • Nasdaq 100 – 19% (matches lowest)

Fifth, Investors Intelligence US Advisers Sentiment Report readings as of Tuesday, May 3 (before the Federal Reserve report and subsequent whiplash market action) –

Bear = 39.3% (comparable to 2018 bear market and 2020 Covid sell-off readings)

The Bottom Line: Take Advantage of This Stock Market Negativity

In the last five months, the shares have fallen significantly. Think back to the days in November/December when they were at their highest. The mood was upbeat, the news was positive, and growth seemed assured. There was little concern for the few negative problems that were beginning to appear. Selling then would have achieved the goal of “selling high.”

Today we are seeing the other side. Stocks are at their lows, having been pushed lower by the negative issues that are now widely discussed. The positives are ignored. Add to that the jittery nerves from several weeks of volatility surrounding the downtrend. Clearly an opportunity to “buy low”.

So, from now on, be positive about future developments and anticipate that Wall Street, and then stock investors, will once again look on the bright side of the future.

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